I’m looking forward to sharing my thoughts on investing strategy with you, in the context of a negative sum game. But first, a little “yes / no” test to make sure we are on the same page. All other things being equal:
- When you go into a casino to play your favorite game, do you expect to win money?
- A colleague asks you if you want to flip a coin for $100 a flip. Do you agree?
- You end up flipping and it comes up heads 10 times in a row. Do you think the next flip is more likely to come up tails?
- Do you want to double-or-nothing that the next flip will now be tails because you have a hunch that it is “due”?
The only acceptable answer to all four questions are “no.” In case you need an explanation:
- With the possible exception of poker, blackjack (only if you count cards and/or shuffle track) and some rare video poker machines, EVERY game in the casino is negative expected value. There is no way you can win in the long run. Period. If you think otherwise, you need to check out this site. The only reason to play most casino games is for the “entertainment” value – you are paying (in negative expected value) to be “entertained.” If you find no enjoyment in “possibly winning money but probably losing money,” you should not be gambling at a casino.
- The expected value of this game is at most zero. Why at most? There’s a nonzero chance your colleague can be cheating (and I assume you are honest and not cheating). Taking risk for no reason (i.e. no expected return) is not the sign of good risk management. The only reason to play this game is for the “entertainment” value. If you think you can make money off of this, you need to check out this site. If you feel the need to play this game for more than 60 seconds, you may want to check out this site.
- The expected value of this game is still zero, regardless of how many times it has come up heads. If you think otherwise, you need to check out this site.
If you do not understand why you got any of the questions wrong, then you need to stop actively trading – you are only going to hurt yourself and your loved ones. Seriously. I’m not trying to be mean (maybe “trying” to be funny), but you will thank me one day. You really need to ask yourself why you would want to engage in an activity that requires the weighing of risks and rewards, against some of the smartest people in the world in a negative sum game, and have a lot of your heard-earned money on the line, when you would be terrible at it! Sorry – I just say it the way it is. If you are going to succeed, the quality of your decision-making MUST be one of your “edges.” You are already at a severe disadvantage as it is. Making decisions based on an understanding of reward and risk is the cornerstone of successful active trading. If you can’t make even the most basic decisions on reward and risk, you have no chance of success at trading. Try passive investing and find another hobby instead. Passing this test in no way means you will succeed. But failing it almost certainly means you will lose.
You may be asking, “What about Question 4?” If you read the other answers and still think the answer to Question 4 is “yes,” you win the grand prize! You can register yourself and collect your prize here. Also, please leave my site immediately (I’m not joking), and instead go directly here.
Next week… before we get to the “game,” you need to take a look at yourself.